BMO's Semiconductor Pair Trade: Buy ON, Step To The Sidelines On Xilinx

Pair trading is a market-neutral strategy that matches a long position in an asset with an offsetting position in another asset, with both being highly correlated. An analyst at BMO Capital Markets recommended a pair trade in the semiconductor sector Monday, recommending buying ON Semiconductor Corp ON and moving to the sidelines on Xilinx, Inc. XLNX.

The Analyst

Analyst Ambrish Srivastava upgraded ON Semiconductor from Market Perform to Outperform and increased the price target from $20 to $30.

At the same time, the analyst downgraded Xilinx from Outperform to Market Perform and raised the price target from $100 to $125.

'We Are Buyers of ON And We Would Be Buyers'

ON will continue to execute on its strategic focuses and remain structurally profitable going forward, Srivastava said in the upgrade note.

With structural and consistent improvements being made in the company's operating model and its valuation being taken into consideration, the analyst said he is a buyer today and would be a buyer on an "inevitable" lowering in lead times.

ON has grown its margins consistently over the last few years, the analyst said, adding that he expects continued margin improvement despite the tough 2019.

The company has opened up new market opportunities in areas such as 5G, power and EV, Srivastava said.

"We like the risk-reward profile for ON."

BMO Sees Unattractive Risk-Reward In Xilinx

Xilinx has consistently grown its top-line and expanded its markets, Srivastava said in the downgrade note.

"The company has also done a decent job of articulating and executing on its message of not thinking of Xilinx as merely an FPGA company, as it strives to transform to a more platform-based approach."

Yet the stock's valuation adequately reflects the company's opportunity, the analyst said.

"Given where XLNX is trading at, both on valuation and sentiment, and how we think of risk-reward, we find it hard to justify an Outperform rating."